Exhibit 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pasteur Sanofi Diagnostics:
We have audited the accompanying consolidated balance sheets of
Pasteur Sanofi Diagnostics (PSD) (a French corporation) and Subsidiaries
as of December 31, 1998 and 1997, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements
are the responsibility of PSD's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Pasteur Sanofi Diagnostics and Subsidiaries as of
December 31, 1998 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting
principles in the United States.
PGA
/s/ Philippe Mongin
Partner of Andersen Worldwide
Paris, France
July 31, 1999
1
PASTEUR SANOFI DIAGNOSTICS SA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997
(in millions of U.S. dollars, except share and per share data)
1998 1997
ASSETS
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . $ 6.9 $ 3.7
Accounts receivable, net of allowance of
$6.5 million and $6.5 million respectively . . 84.7 80.9
Inventories:
Raw materials . . . . . . . . . . . . . . . . . 8.1 7.7
Work in process . . . . . . . . . . . . . . . . 13.5 12.7
Finished goods. . . . . . . . . . . . . . . . . 22.2 21.0
Total inventories . . . . . . . . . . . . . . 43.8 41.4
Prepaid expenses and other current assets . . . . . 10.9 9.2
Current portion of note receivable . . . . . . . . . 4.3 4.2
Total current assets . . . . . . . . . . . . . 150.6 139.4
Property, Plant and Equipment:
Land . . . . . . . . . . . . . . . . . . . . . . 0.6 0.6
Buildings . . . . . . . . . . . . . . . . . . . 36.8 31.0
Equipment. . . . . . . . . . . . . . . . . . . . 96.4 86.3
Total property, plant and equipment . . . . . 133.8 117.9
Accumulated depreciation . . . . . . . . . . . (91.7) (79.2)
Net property, plant and equipment. . . . . . . 42.1 38.7
Note receivable, net of current portion . . . . . . 18.0 20.8
Intangible and other assets, net . . . . . . . . . . 1.2 1.4
Total assets . . . . . . . . . . . . . . . . . $211.9 $200.3
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Lines of credit. . . . . . . . . . . . . . . . . . $ 17.3 $ 16.7
Accounts payable . . . . . . . . . . . . . . . . . 25.0 31.0
Related entity payable, net. . . . . . . . . . . . 95.3 78.5
Royalty accruals . . . . . . . . . . . . . . . . . 6.9 5.3
Royalties payable to related entity. . . . . . . . 8.3 5.7
Payroll accruals . . . . . . . . . . . . . . . . . 8.9 8.7
Other current liabilities. . . . . . . . . . . . . 13.5 16.8
Total current liabilities . . . . . . . . . . 175.2 162.7
Deferred Tax Liability . . . . . . . . . . . . . . . -- --
Long-Term Liabilities. . . . . . . . . . . . . . . . 9.9 7.5
Commitments and Contingencies
Stockholders' Equity:
Common stock (par value of $20; 2,321,160 shares
authorized, issued and outstanding as of
December 31, 1998 and 1997) . . . . . . . . . . . 47.3 47.3
Additional paid-in capital . . . . . . . . . . . . 182.2 182.2
Accumulated deficit . . . . . . . . . . . . . . . (179.5) (175.7)
Accumulated currency translation adjustment. . . . (23.2) (23.7)
Total stockholders' equity . . . . . . . . . . 26.8 30.1
Total liabilities and stockholders' equity. . $211.9 $200.3
The accompanying notes are an integral part of these statements.
2
PASTEUR SANOFI DIAGNOSTICS SA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions of U.S. dollars, except share and per share data)
Year Ended December 31,
1998 1997 1996
Revenue:
Net sales .......................... $201.8 $227.5 $259.9
Royalty revenue .................... 17.9 18.3 20.6
Related entity sales ............... 9.2 10.8 8.0
Total revenue .................... 228.9 256.6 288.5
Cost of Sales:
Product cost of sales ............... 93.4 103.0 112.0
Royalty expense ..................... 15.6 13.9 13.8
Related entity royalty expense....... 12.0 14.3 14.7
Total cost of sales.............. 121.0 131.2 140.5
Gross profit .................... 107.9 125.4 148.0
Operating Expenses:
Selling, general and administrative.. 74.4 89.7 112.1
Distribution ........................ 8.6 8.7 10.4
Research and development ............ 22.6 23.8 38.5
Total operating expenses......... 105.6 122.2 161.0
Operating income (loss) ......... 2.3 3.2 (13.0)
Interest expense, net ................. (5.4) (5.9) (8.9)
Other, net ............................ 0.3 (5.6) (26.8)
Pretax loss ..................... (2.8) (8.3) (48.7)
Income tax............................. 1.0 0.7 (0.2)
Net Loss .............................. $ (3.8) $ (9.0) $(48.5)
Basic and diluted loss per share ...... $(1.63) $(3.88) $(20.89)
Weighted average common
shares outstanding ..................2,321,160 2,321,160 2,321,160
The accompanying notes are an integral part of these statements.
3
PASTEUR SANOFI DIAGNOSTICS SA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
(in millions of U.S. dollars, except share and per share data)
Accumulated
Additional Currency Total
Common Stock Paid-in Accumulated Translation Stockholders
Shares Amount Capital Deficit Adjustment Equity
Balance,
December 31, 1995...... 2,321,160 $ 47.3 $182.2 $(118.2) $(10.4) $100.9
Net loss ............. -- -- -- (48.5) -- (48.5)
Currency translation
adjustment........... -- -- -- -- (5.0) (5.0)
Balance,
December 31, 1996...... 2,321,160 47.3 182.2 (166.7) (15.4) (47.4)
Net loss.............. -- -- -- (9.0) -- (9.0)
Currency translation
adjustment........... -- -- -- -- (8.3) (8.3)
Balance,
December 31, 1997...... 2,321,160 47.3 182.2 (175.7) (23.7) 30.1
Net loss.............. -- -- -- (3.8) -- (3.8)
Currency translation
adjustment........... -- -- -- -- 0.5 0.5
Balance,
December 31, 1998..... 2,321,160 $47.3 $182.2 (179.5) $(23.2) $26.8
The accompanying notes are an integral part of these statements.
4
PASTEUR SANOFI DIAGNOSTICS SA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of U.S. dollars)
Year Ended December 31,
1998 1997 1996
Operating Activities:
Net loss ...................................... $ (3.8) $ (9.0) $(48.5)
Adjustment to reconcile net loss to net cash
provided by (used in) operating Activities:
Depreciation and amortization ............. 11.3 15.4 24.0
Loss on sale of assets .................... -- 3.9 1.3
Changes in operating assets and liabilities:
Decrease in inventories ................... 0.8 4.3 3.0
Decrease (increase) in trade and other
receivables .............................. 3.1 (3.5) (3.1)
Decrease in other assets .................. 3.7 1.4 2.4
Increase (decrease) in accounts payable ... (8.0) 16.9 (8.9)
Increase (decrease) in other liabilities .. 0.1 (12.8) 29.7
Net cash provided by (used in)
operating activities.................... 7.2 16.6 (0.1)
Investing Activities:
Purchase of property and equipment ............ (14.0) (26.6) (26.4)
Proceeds from sales of property and equipment.. -- 23.7 0.6
Net cash used in investing activities.... (14.0) (2.9) (25.8)
Financing Activities:
Proceeds from (repayment of) lines of credit... (0.6) (31.4) 0.2
Proceeds from related entity .................. 10.2 20.4 33.4
Proceeds from issuance of long-term debt ...... -- (2.9) 4.3
Repayment of principal of long-term debt ...... -- -- (14.8)
Net cash provided by (used in)
financing activities.................... 9.6 (13.9) 23.1
Effect of Foreign Exchange Rate Changes on Cash . 0.4 (0.6) (0.4)
Net Increase (Decrease) in Cash ................. 3.2 (0.8) (3.2)
Cash and cash equivalents, beginning of year .... 3.7 4.5 7.7
Cash and cash equivalents, end of year .......... $ 6.9 $ 3.7 $ 4.5
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest .................................... $ 5.7 $ 6.4 $ 4.5
Income taxes ................................ 0.9 1.1 0.3
The accompanying notes are an integral part of these statements.
5
PASTEUR SANOFI DIAGNOSTICS SA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(in millions of U.S. dollars)
1. Presentation of the Company:
Pasteur Sanofi Diagnostics (PSD) is a Societe Anonyme registered in
France. PSD is involved in the research, development, manufacture and
distribution of diagnostics products, including primarily reagents and
microplates systems. The shareholders of PSD are Sanofi-Synthelabo
(Sanofi) and Institut Pasteur, 73.66 percent and 26.34 percent,
respectively.
PSD has an international presence with a strong position in Western
Europe (49 percent of 1998 sales), emerging countries (28 percent of
1998 sales), North America (16 percent of 1998 sales) and Japan (7
percent of 1998 sales).
On July 3, 1999, Bio-Rad entered into an agreement with Sanofi-
Synthelabo and Institut Pasteur to acquire the stock of PSD and
certain other ancillary assets and to repay debt of PSD for total
consideration not to exceed $210 million, subject to adjustments. The
purchase price will be funded with the proceeds of a senior
subordinated note offering, together with borrowings under a new
senior credit facility, which will include a term loan and a revolving
credit facility.
2. Summary of Significant Accounting Policies:
Basis of Presentation
The consolidated financial statements include the accounts of PSD
and its majority-owned subsidiaries after elimination of intercompany
balances and transactions. All entities included in the financial
statements have a 12-month period of operations that ended as of
December 31. These financial statements have been prepared from the
accounting records maintained in France. All amounts are presented in
millions of U.S. dollars, except share amounts and unless otherwise
noted.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Changes in such estimates
may affect amounts reported in the future.
Foreign Currency Translation
PSD's functional currency is the French Franc. In the accompanying
financial statements, assets and liabilities are translated into U.S.
dollars at the current exchange rate as of the applicable balance
sheet dates. Revenue and expenses are translated at the weighted
average exchange rate prevailing during the 12-month periods. Net
exchange gains or losses resulting from the translation of assets and
liabilities of foreign subsidiaries, except those in highly
inflationary economies, are accumulated in a separate section of
stockholders' equity entitled, "Accumulated currency translation
adjustment."
Concentration of Credit Risk
Financial instruments that potentially subject PSD to concentration
of credit risk consist primarily of trade accounts receivable. PSD
performs credit evaluation procedures and generally does not require
collateral. Credit risk is limited due to the large number of
customers and their dispersion across many geographical areas. In
addition, a significant amount of trade receivables are with national
healthcare systems in countries within the European Economic
Community. PSD does not currently anticipate a significant credit loss
associated with these receivables.
6
Sanofi Fujirebio Diagnostics, Inc., a joint venture with Fujirebio,
Inc., conducts all its business with Fujirebio, Inc. This represents
sales of $14.5 million, $21.8 million and $9.3 million in 1998, 1997
and 1996, respectively. The accounts receivable balances due from
Fujirebio were $5.6 million in 1998 and $5.0 million in 1997.
PSD has a note receivable from Beckman Instruments, Inc. Payment on
this note is by installments, with an installment due on April 30 each
year, up to and including April 30, 2004. The short-term element of
this note receivable was $4.2 million in 1998 and $4.2 million in
1997. The long-term portion of this note receivable was $18.0 million
in 1998 and $20.8 million in 1997.
Inventories
Inventories are valued at the lower of average cost or market and
include material, labor and overhead costs.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and
amortization computed using the straight-line method over the
following estimated useful lives:
Buildings..................... 20 years
Leasehold improvements........ 3-10 years (or over the remaining
lease term, if shorter)
Software...................... 1-4 years
Production equipment.......... 3-10 years
Other equipment............... 10 years
Retirement Benefits
PSD accrues the costs of pension, termination and postretirement
benefits during the years in which the employees render services.
Related benefit expense is determined by an actuary, in accordance
with SFAS 87. Liabilities and prepaid expenses are accrued on an
actuarial basis using, in most cases, actuarial methods and
assumptions that are compatible with U.S. GAAP requirements.
For defined contribution plans and multiemployer pension plans,
expenses are recorded as incurred. For defined benefit indemnities,
retirement plans and postretirement benefit plans, liabilities and
prepaid expenses are accrued over the estimated term of service of the
employee using actuarial methods. Differences caused by actuarial
gains or losses arising from changes in actuarial assumptions are
amortized over the residual working life of the employees.
Revenue Recognition
Revenue from sales is recognized at the time products are shipped
or service is rendered and all significant obligations of PSD are
complete.
7
Research and Development Costs
Research and development costs are charged to the profit and loss
account as incurred.
Forward Exchange Contracts
PSD does not use derivative financial instruments for speculative
or trading purposes. As part of distributing its products, PSD
regularly enters into transactions in currencies other than the French
Franc. Sanofi enters into forward foreign exchange contracts to hedge
against future movements in foreign exchange rates that affect
foreign-currency-denominated receivables and payables on behalf of
PSD. These contracts generally have maturity dates of 11 months or
less and relate primarily to currencies of industrial countries. The
fee for the administration of these contracts is 0.1 percent of the
face value of the transaction carried out on PSD's behalf. The
resulting gains or losses are included in other income and expense
offsetting exchange losses or gains on the related receivables and
payables. Unrealized gains and losses are not deferred. Exchange gains
and losses on these contracts are net of the premiums and discounts
resulting from interest rate differentials between France and the
countries of the currencies being traded.
Income Taxes
Deferred taxes are provided utilizing the liability method in
accordance with by SFAS No. 109, "Accounting for Income Taxes,"
whereby deferred tax assets are recognized for deductible temporary
differences and operating loss carryforwards, and deferred tax
liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts
of assets and liabilities and their tax bases. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets
will not be realized.
Earnings per Share
Basic earnings per share are calculated on the basis of the
weighted average number of common shares outstanding for each period.
Fair Value of Financial Instruments
For certain of PSD's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable, long-term debt and
forward exchange contracts, the carrying amounts approximate fair
value. The fair values of other instruments are disclosed in relevant
notes to the financial statements.
3. Divestitures:
As a result of the increasing difficulties encountered in
developing a profitable business with the AccessTM product line,
particularly in North America, PSD divested this product line in 1996.
Consequently, an asset purchase agreement was signed on March 24,
1997, with the U.S. company Beckman Instruments Inc (Beckman), under
which all Access-related intellectual property rights, the U.S.
production facility and other Access assets worldwide were sold. The
final purchase date was April 30, 1997.
Three agreements were signed with Beckman:
8
. A manufacturing agreement for Access reagents produced in the
French Steenvoord facility for a period of seven years.
. A scientific cooperation agreement for a three-year period.
. A distribution agreement, under which Beckman agreed to appoint
PSD as its exclusive distributor for Access products in selected
territories for a three-year period (five years in France).
The estimated costs of this disposal were provided in the financial
statements for the year ended December 31, 1996, for an aggregate
amount of $26.4 million. The actual cost of the divestiture incurred
in 1997 was $27.1 million, including the following:
Employee severance and relocation........................ $ 6.7
Cost of transfer of manufacturing........................ 3.3
Loss on disposal......................................... 14.9
Other related costs...................................... 2.2
The proceeds of the sale of $53.8 million included a cash portion
of $23.7 million and a note of $30.1 million, which is payable in
installments of $4.3 million on each anniversary of the sale date for
seven years. The final payment will occur on April 30, 2004. This
long-term note receivable was discounted at the closing date by $5.9
million. The interest income included in the financial statements in
relation to this receivable is $1.3 million for 1998 and 1997,
respectively. The effective interest rate for this note is 5.7
percent.
Net sales from the Access product line for 1998, 1997 and 1996,
respectively, were $37.8 million, $45.4 million and $57.1 million. The
net operating income or losses are not separately identifiable.
4. Lines of Credit:
PSD has the following short-term financing facilities:
December 31, December 31,
1998 1997
Authorized lines of credit................ $37.0 $35.0
Outstanding amounts under lines of credit. 17.4 16.7
Maximum balances outstanding.............. 20.0 18.0
Average balances outstanding.............. 14.0 16.0
Average interest rates on outstanding balances were 6.1 percent in
1997 and 5.7 percent in 1998.
5. Operating Leases:
PSD leases certain equipment and premises under operating leases
that expire on various dates. Future payments on operating leases are
due as follows:
Year Ending December 31, Amount
1999 ................................................. $5.2
2000 ................................................. 3.2
2001 ................................................. 2.0
2002 ................................................. 2.1
2003 ................................................. 2.1
Thereafter............................................ 6.0
Total minimum lease payments...................... $20.6
Net rental expense under operating lease was $4.5 million, $4.6
million and $5.2 million in 1998, 1997 and 1996, respectively.
9
6. Retirement Benefits:
PSD provides various types of retirement and termination benefits
to its employees. The type of benefits offered to an individual
employee group is determined by the local legal requirements as well
as the historical operating practices of the specific business unit.
Pension benefits are generally determined using a formula that uses
the employee's years of credited service and average final earnings.
Termination benefits are generally lump-sum payments based upon an
individual's years of credited service and annualized salary at
retirement or termination of employment.
The actuarial assumptions used vary by business unit and country,
based upon local considerations, with the following averages:
Benefit obligation discount rate............................4 to 6%
Estimated annual rate of increase in future compensation....2 to 8%
Net benefit costs related to PSD's defined benefit plans included
the following components:
Pension Benefits
1998 1997 1996
---- ---- ----
Net periodic cost:
Service cost.............................. $(0.6) $(0.7) $(0.6)
Expected interest cost.................... (0.4) (0.4) (0.5)
Amortization of net transition obligation. (0.2) (0.2) (0.3)
----- ----- -----
Net periodic benefit cost................. $(1.2) $(1.3) $(1.4)
===== ===== =====
The plans are unfunded. The net pension liability is included in
long-term liabilities in the accompanying balance sheet. The following
tables set forth the defined benefit plans' change in benefit
obligation and the net pension liability:
1998 1997 1996
---- ---- ----
Change in projected benefit obligation:
Projected benefit obligation at beginning of
year........................................ $(8.9) $(9.3) $(8.6)
Service cost............................... (0.6) (0.7) (0.6)
Interest cost.............................. (0.4) (0.4) (0.5)
Actuarial gain............................. -- -- (0.2)
Benefits paid.............................. 0.2 0.4 0.1
Other (exchange rate)...................... (0.6) 1.2 0.5
----- ----- -----
Projected benefit obligation at end of year.. (10.3) (8.8) (9.3)
Unrecognized actuarial loss.................. 0.2 0.2 0.2
Unrecognized actuarial transition obligation. 1.7 1.8 2.4
----- ----- -----
Net pension liability........................ $(8.4) $(6.8) $(6.7)
===== ===== =====
Multiemployer Plans
Certain employees of PSD participate on a commingled basis with
other (non-PSD) companies in defined benefit pension plans. Such
commingled plans are known as multiemployer pension plans. Pension
expense for multiemployer pension plans is recorded based upon the
agreed funding requirements, and was $0.5 million, $0.5 million and
$1.5 million for the years ended December 1998, 1997 and 1996,
respectively. The decrease between 1996 and 1997 resulted from the
sale in 1997 of the Access segment (581 active participants were
terminated in April 1997).
10
The multiemployer pension plans include current and former
employees of Sanofi. According to an agreement in principle between
Sanofi and PSD, Sanofi remains liable for the benefit obligations
accrued up to the closing date to the employees of SDP Inc. and
Genetic Systems Corporation.
Recent actuarial valuations indicate that only one multi-employer
plan has a significant projected benefit obligation and that this plan
is adequately funded.
7. Commitments and Contingencies:
On April 30, 1997, Sanofi agreed to guarantee in favor of Beckman
the full and timely payment by PSD or SDP Inc. of all sums due under
their indemnification obligation provided by Article IX of the Asset
Purchase Agreement entered into between PSD, SDP Inc. and Beckman on
March 24, 1997, whereby PSD and SDP Inc. sold to Beckman their Access
immunoassay analyzer business.
Pursuant to such Asset Purchase Agreement, Beckman is entitled to
be indemnified in full for any and all loss resulting from any
proceedings by Johnson & Johnson Clinical Diagnostics Ltd. (or any
successor-in-interest) against Beckman alleging infringement of
European patent 149 565, U.S. Patent 4 745 077 or Japanese patent 60-
159651 arising out of the manufacturing and/or sale by, or on behalf
of, Beckman of the Access immunoassay analyzers and/or related
consumables.
Pursuant to an agreement dated April 28, 1997, PSD has agreed to
hold Sanofi harmless from and against any sums that Sanofi may pay
under the guaranty.
Central Labo Europe (CLE) alleged breach of design and trademark by
Europlastic, a supplier for PSD. The product in question is
manufactured exclusively for PSD. PSD agreed to pay any damages
awarded to CLE if Europlastic was found guilty. CLE is suing for $2.1
million in damages. PSD is requesting DIAMED, the owner of the patent
licensed to PSD, to hold it harmless in the CLE dispute, if necessary.
In 1992, Biochem-Immuno Systems, Inc. ("Biochem") sued Institut
Pasteur and PSD jointly, seeking a license under certain of Institut
Pasteur's patents and further requesting damages of $11.3 million.
Prior to the filing of the claim, the parties had engaged in
discussions regarding a possible license arrangement but had not
reached agreement before Biochem began marketing products covered by
the Institut Pasteur patents. The matter is before the Superior Court
of the District of Montreal, in the province of Quebec, Canada. Since
1994, no papers have been filed and no actions have been taken by
either party. Counsel for PSD believes the foregoing action has no
merit and should be dismissed.
PSD granted to Biomerieux a license to sell certain diagnostic
products. Subsequently, Biomerieux purchased Cambridge Biotech
Corporation ("Cambridge"), which had an existing separate license
agreement with PSD granting it the right to sell different diagnostic
products. The Cambridge-PSD license called for lower royalty payments
than those provided in the Biomerieux-PSD agreement. PSD filed an
action in Paris against Biomerieux on January 15, 1999 for unpaid
royalties under the Biomerieux-PSD license. Biomerieux counterclaimed
that it was entitled to lower royalty rates pursuant to the lower
rates set forth in the Cambridge-PSD license and alternatively that it
was entitled to indemnification from PSD for approximately $9.5
million, which it alleged was the price it paid to acquire Cambridge.
Counsel for PSD believes the counterclaim has no merit.
PSD is a party to various other claims, legal actions and
complaints arising in the ordinary course of business. In the opinion
of management and counsel, the outcome of these claims and legal
actions would have no material adverse effects on the future results
of operations or the financial position of PSD.
PSD is currently in dispute with the French tax administration,
relating to tax treatment of royalties paid on unpatented techniques
and withholding tax on an intercompany loan. The total amount in
dispute is $1.5 million. According to PSD policy these disputed
amounts have not been paid, nor have they been provided for, but
warranty has been provided to the French tax administration, as
required under French tax law.
11
The practices, which gave rise to the dispute described above, have
continued to be applied on a consistent basis since the period subject
to tax audit (1991-1994). The tax exposure resulting from the
continued use of these practices, excluding penalties is estimated at
$0.8 million per year. These risks are covered by Sanofi's
indemnification of Bio-Rad pursuant to the purchase agreement between
Bio-Rad and Sanofi.
PSD and its subsidiaries are committed to purchase Access
consumables for a minimum amount of $8.5 million and a minimum number
of 90 Access instruments from Beckman Coulter during 1999.
PSD has $13.4 million to be received against foreign currencies
delivered (out of which $9.3 million relates to Japanese Yen and $3.1
million relates to U.S. dollars), and $12.7 million to deliver against
foreign currencies to be received (out of which $11.7 million relates
to U.S. dollars).
PSD has granted comfort letters or guarantees to banks in favor of
its subsidiaries to secure local borrowings, for a total of $16.2
million.
8. Other, Net:
Other, net comprises the following items:
1998 1997 1996
---- ---- ----
Effects of Access sale................... $ -- $(6.0) $(26.4)
Foreign exchange gains................... 1.0 0.8 0.2
Foreign exchange losses.................. (0.4) (0.6) --
Other.................................... (0.3) 0.2 (0.6)
---- ----- ------
Total................................ $0.3 $(5.6) $(26.8)
==== ===== ======
9. Royalty Income and Expense:
PSD has royalty agreements with Sanofi, Institut Pasteur and other
third party license holders. The related party element of these
royalty income and expenses are disclosed under Note 11.
PSD grants sublicenses to third parties for the use of patents in
order to manufacture and distribute products using such patents. These
sublicense agreements generally provide for the payment of royalties
based on sales of the licensee related to such products. Related
revenue is recognized at the time of the sale.
Royalty expense includes royalties which are due for the use of
patents to manufacture and distribute certain products. These are
calculated on the basis of a percentage of sales made by PSD or its
sublicensees or on the basis of unitary fixed amounts of the products.
Related expenses are recognized at the time of the sale of the
products.
10. Income Taxes:
PSD has a tax sharing agreement with Sanofi. Income taxes have been
calculated for PSD and each of its subsidiaries on a separate company
basis pursuant to the requirements of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
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The components of pretax loss are as follows:
1998 1997 1996
---- ---- ----
French.................................. $(1.9) $19.5 $(25.4)
International........................... (0.9) (27.8) (23.3)
----- ----- -----
Income before taxes and extraordinary
charge.............................. $(2.8) $(8.3) $(48.7)
===== ===== ======
The provision for income taxes consists of:
1998 1997 1996
---- ---- ----
Current:
French................................. $0.1 $(0.4) $(0.2)
International.......................... 0.9 1.1 0.1
---- ----- -----
Provision for income taxes................ $1.0 $ 0.7 $(0.1)
==== ===== =====
PSD's income tax provision differs from the amount computed by
applying the French statutory rate to income before taxes as follows:
1998 % 1997 % 1996 %
---- --- ---- --- ---- ---
Income charged at
statutory tax rate.......$(1.2) (41.7) $(3.5) (41.7) $(17.8) (36.7)
Permanent differences...... (0.3) (10.5) (8.0) (96.0) 11.8 24.4
Differences between French
statutory rate and
other tax rates.......... (0.5) (16.5) 3.7 44.1 -- --
Tax credits used........... (0.2) (8.9) (0.8) (10.1) (1.7) (3.5)
Utilization of carryforward
losses................... (0.5) (17.7) (1.0) (12.0) (0.2) (0.5)
Effect of carryforward
losses................... 3.6 127.7 10.9 131.8 7.9 16.4
Other...................... 0.1 3.4 (0.6) (7.8) 0.2 (0.4)
---- ----- ---- ----- ----- ----
Actual tax charge......$ 1.0 35.8 $ 0.7 8.3 $0.2 (0.3)
The components of the deferred tax asset (liability) consisted of
the following:
December 31, December 31,
1998 1997
------------ ------------
Current deferred tax asset:
Temporary timing differences............. $ 5.0 $ 13.0
Other temporary differences between tax
reporting and U.S. GAAP
financial reporting:
Elimination of intercompany profit.... 3.6 4.1
Tax benefit of loss carryforwards..... 71.6 66.6
Other, net............................ 5.4 3.1
----- ------
Total deferred tax asset.............. 85.6 86.8
Valuation allowance................... (85.6) (86.8)
----- ------
Net current deferred tax asset.............. $ -- $ --
===== ======
Noncurrent deferred tax liability........... $ -- $ --
===== ======
The valuation allowance is needed to reduce the deferred tax asset
to an amount that is more likely than not to be realized.
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At December 31, 1998, PSD had net operating loss carryforwards of
$107.9 million and $136.0 million of capital loss carryforwards. These
carryforwards will expire in the following years:
Net Operating Capital Losses
Expiration Date Loss Carryforward Carryforward
--------------- ----------------- ---------------
2000............................. $ -- $ --
2001............................. 0.1 5.0
2002............................. 0.4 --
2003............................. 0.6 --
2004 to 2012..................... 104.1 131.0
Unlimited........................ 2.7 --
------ ------
$107.9 $136.0
====== ======
These carryforwards mainly relate to the subsidiaries located in
France and in the United States of America and their utilization is
limited to the separate taxable income of the subsidiaries. The
capital losses carryforward may only be utilized against future
capital gains.
PSD does not provide for taxes that would be payable if the
cumulative undistributed earnings of its international subsidiaries
were remitted. Unless it becomes advantageous for tax or foreign
exchange reasons to remit a subsidiary's earnings, such earnings are
indefinitely reinvested in subsidiary operations.
11. Related Entity Transactions and Balances:
PSD makes sales to other companies within the Sanofi group. Such
sales are included in the profit and loss account.
PSD has a royalty agreement with Institut Pasteur. Royalty expense
includes royalties paid for the use of the Pasteur name. These are
calculated on the basis of a percentage varying between 1 percent and
2 percent of net sales in each subsidiary.
Additional transactions with Institut Pasteur (mainly relating to
research and development costs and rights to first refusal on new
products) were $2.1 million, $2.3 million and $2.7 million in 1998,
1997 and 1996, respectively. Additionally, PSD's premises at Marnes la
Coquette are leased to PSD by Institut Pasteur. The rentals charged
through the profit and loss account with respect to this lease
agreement were $0.9 million, $0.9 million and $1.0 million in 1998,
1997 and 1996, respectively.
Elements of costs incurred by Sanofi on behalf of PSD are also
included in the profit and loss account as follows:
1998 1997 1996
---- ---- ----
Sales representatives..................... $ 3.6 $ 4.4 $ 3.2
Shared services........................... 3.4 4.0 4.9
Holding company costs..................... 0.2 0.3 0.2
Finance costs............................. 4.7 4.9 4.5
----- ----- -----
Total................................. $11.9 $13.6 $12.8
===== ===== =====
Shared service and sales representatives' costs are charged to PSD
at cost plus a mark-up of 1 percent to 5 percent and include both
direct and indirect costs, while holding company expenses are
calculated on the basis of actual costs incurred and allocated based
on headcount and sales figures for each Sanofi division. Finance costs
are the actual costs incurred by each Sanofi division in using the
Sanofi cash-pooling facility. The cost of borrowing is based on the
market rate plus a margin.
14
Sanofi also provides working capital financing. Interest is payable
on the net related entity payable at a rate of 3.5 percent to 4.5
percent. The interest charged was $5.0 million, $5.3 million and $5.2
million in 1998, 1997 and 1996, respectively. Interest receivable from
related parties was $0.3 million, $0.4 million and $0.6 million for
1998, 1997 and 1996, respectively.
12. Employee Profit-Sharing Plans:
Sanofi operates a profit-sharing plan. Profit sharing is calculated
on the basis of actual evolution of consolidated earnings per share of
the Sanofi group.
The amounts included in the profit and loss account for employee
profit sharing for 1998, 1997 and 1996 are $2.5 million, $2.1 million
and $2.0 million, respectively.
13. Segment Information:
The business is managed through zones defined by country of origin
of sales. All sales are derived from in-vitro diagnostic products.
Geographic sales data is presented below:
1998 % 1997 % 1996 %
---- --- ---- --- ---- ---
France.................... $101.7 48 $101.0 42 $109.6 41
USA....................... 33.3 16 44.4 19 63.1 24
Other foreign............. 76.0 36 92.8 39 95.2 35
------ --- ------ --- ------ ---
Total................. $211.0 100 $238.2 100 $267.9 100
====== === ====== === ====== ===
The following presents long-lived assets by geographical area,
based upon the location of the asset:
1998 1997 1996
---- ---- ----
France................................. $23.5 $24.6 $24.8
USA.................................... 32.4 31.1 47.6
Other foreign.......................... 5.4 5.0 12.2
----- ----- -----
Total.............................. $61.3 $60.7 $84.6
===== ===== =====
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